World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Nov. 6 (Bloomberg) -- John S. Reed, who helped engineer the merger that created Citigroup Inc., apologized for his role in building a company that has taken $45 billion in direct U.S. aid and said banks that big should be divided into separate parts.

“I’m sorry,” Reed, 70, said in an interview yesterday. “These are people I love and care about. You could imagine emotionally it’s not easy to see what’s happened.”

Citigroup was formed in 1998 when Citicorp, a commercial bank, combined with Sanford I. Weill’s Travelers Group Inc., which owned the investment firm Salomon Smith Barney Holdings Inc. The New York-based company lost $27.7 billion in 2008 and took $118 billion in writedowns. Now 34 percent-owned by the Treasury Department, Citigroup sought help in the wake of a credit freeze that claimed three of Wall Street’s biggest firms and led to the deepest recession in 70 years.

Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.

“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.”

Glass-Steagall RepealLawmakers were wrong to repeal the Depression-era Glass- Steagall Act in 1999, Reed said. At the time, he supported overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.

“We learn from our mistakes,” said Reed, who wrote an Oct. 21 letter to the editor of the New York Times endorsing a division of banking activities. “When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.”

Reed headed Citicorp for 14 years until the merger with Travelers. The deal created the world’s biggest financial company in a stock swap valued at about $85 billion. Reed and Weill were co-chairmen and co-chief executive officers until Reed’s retirement in 2000.

Citigroup spokesman Stephen Cohen declined to comment.

Reed’s CompensationFrom 1997 to 1999, Reed received salary and bonuses totaling $23.4 million, according to Citigroup filings. In 2000, he received a retirement bonus of $5 million, filings show. Citigroup provides him with an assistant and a New York office, for which he pays taxes, he said.

Citigroup, the third-largest U.S. bank, shed about $300 billion in assets, or 13 percent of its total, in the year ended Sept. 30 and is selling what it calls non-core properties, according to regulatory filings. The company said yesterday that it will spin off its Primerica Financial Services subsidiary.

CEO Vikram S. Pandit has eliminated about 100,000 jobs since late 2007, reducing the headcount by 26 percent as of Sept. 30.

Citigroup pioneered the production of collateralized debt obligations, bundles of loans whose cash flows were sold to investors. When subprime mortgage borrowers began defaulting on payments in 2007, the CDOs lost value and became part of Citigroup’s $118 billion in writedowns and credit losses.

In the last year, the bank received $45 billion from the U.S. government to bolster its capital and another $300 billion in loss guarantees. The Treasury Department retained its 34 percent stake after converting a portion of the $45 billion in rescue funds to equity.

Citi's John S. Reed/ Sanford Weill/ Robert E. Rubin 1999

That really is a touching apology. I’m sure it comes from the heart, but I’m also sure he won’t be giving back any of that compensation, bonus, stock, or New York office that he received for being so wrong. Meanwhile, those of us who were correct suffer the fallout. Reed is 100% correct in using the compartmentalized ship analogy, although I’m sure his idea of breaking up the banks differs from mine.

From Great Britain to the U.S., the drum beats are growing louder to break up the big banks. Yes, indeed, they are too big to let survive, there is no such thing as too big to fail, the only systemic danger was believing in those who attempt to rob from the people through their "too big to fail" extortions. History shows that in the end, the only truth in regards to size is “the bigger they are, the harder they fall.”

There is a right way and a wrong way to accomplish that feat, however. Breaking them into their parts and then letting each part run amok, like we did to AT&T, would be nuts. The process of breaking them up FOR REAL could be used to clear the world of the scourge of derivatives and DEBT, but somehow I’m willing to bet that’s not what the central bankers have in mind (note how the bill to audit the Fed has now been gutted of all meaningful audits).

Now Senator Bernie Sanders is proposing legislation to break up the big banks:

Nov. 6 (Bloomberg) -- U.S. Senator Bernie Sanders unveiled legislation requiring Treasury Secretary Timothy Geithner to name banks whose collapse may shake the economy and break up the firms in a year, fueling efforts to end taxpayers bailouts.

“If an institution is too big to fail, it is too big to exist,” said Sanders, a Vermont independent. “We should break them up so they are no longer in a position to bring down the entire economy.”

The legislation would give Geithner 90 days to list the commercial and investment banks, hedge funds and insurance companies deemed “too big to fail.” Those firms would be broken up within a year, he said. Representative Paul Kanjorski, a Pennsylvania Democrat, is considering a measure in the House that would break up large financial firms.

Lawmakers seeking to end taxpayer bailouts are considering measures aimed at limiting the size of companies that pose a risk to the financial system. Congress last year set up the $700 billion Troubled Asset Relief Program to shore up Citigroup Inc., Bank of America Corp. and other firms.

“We should end the concentration of ownership that has resulted in just four huge financial institutions holding half the mortgages in America, controlling two-thirds of the credit cards, and amassing 40 percent of all deposits,” Sanders said, citing Bank of America, Citigroup, JPMorgan Chase & Co. and Wells Fargo & Co.

Kanjorski, chairman of a House Financial Services Committee panel on capital markets, this week said he was preparing a measure giving the government power to break apart large firms.

‘Gigantic Tsunamis’“Nowhere in the world in the future will there be gigantic tsunamis coming out of nowhere and striking the entire world’s economy,” he said on Nov. 4.

The Kanjorski measure would amend Chairman Barney Frank’s draft legislation that creates a regulator council to monitor the economy and firms for systemic risk. The committee today considered proposals to change Frank’s measure, and the chairman has said a final vote by members is scheduled Nov. 20.

“Discussion of breaking up large financial institutions that pose systemic risk to the market is gaining traction on the Hill,” FBR Capital Markets analysts led by Paul Miller said in an investor note Nov. 4. “This legislation is currently in its infancy, and Congress has a number of difficult questions to answer before anything can move forward.”

Federal Reserve Governor Daniel Tarullo said Oct. 21 the idea of breaking up large institutions is impractical, calling it “more a provocative idea than a proposal.” Instead, he said any firm that may pose a risk should be subject to stricter oversight. Former Fed Chairman Alan Greenspan on Oct. 15 said regulators should consider breaking up systemically risky firms.

While this rhetoric sounds good, they will be laughing all the way to the proverbial “bank” if we simply just break them into pieces. If we do that, each part will be resold to the public, the securitization and derivatization process will continue unabated, leverage will still have no bounds, and the entire process will play out once again in the future.

The right way to do it is to expose all assets to the light of day, force the process through bankruptcy, place AND ENFORCE leverage limits on the banks (like Glass-Steagall), and end the practice of creating speculation fields in derivative paper.

I’d like to think that the following tune will be played to all the bankers who have screwed up. If we don’t break the banks up correctly, it’s the bankers who’ll be singing this tune to us…

Nov. 7 (Bloomberg) -- The International Monetary Fund said traders are probably using the dollar to fund “carry trades” across the world and the currency may still be overvalued even after its slide this year.

“There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” the IMF said in a report published today. “These trades may be contributing to upward pressure on the euro and some emerging economy currencies.” While the dollar “has moved closer to medium-run equilibrium,” it is still “on the strong side.”

With investors able to borrow at near-zero interest rates in the U.S., some economists are concerned that markets may become distorted as traders plough those funds into riskier assets. Nouriel Roubini, the economist who forecast the financial crisis in 2006, said Nov. 4 that investors are milking the “mother of all carry trades.”

The MSCI All-Countries World Index has gained about two- thirds since March and sugar has soared 90 percent this year. The dollar has dropped 13 percent against a basket of currencies from its major trading partners in the past seven months.

The “carry trade” is not just in U.S. dollar arbitrage, it’s straight out central bankers funneling trillions of dollars to banks outside of the United States. It’s absolutely intentional. So why talk down the dollar? Could it be that they don’t want to see the dollar appreciate? Uh, huh, thought so.

Here’s a word to the world’s central bankers – You debt pushing whack jobs are not fooling anyone but yourselves! Your schemes are widely known and becoming more widely known by the day. You do not control the markets, you can only manipulate them for so long. Your fall will be cheered by the masses, get your bunkers ready, you’ll probably need them, and it will be your just reward for running with the Devil…

Banks, given trillions stolen from the taxpayer, are using their ill-gotten fiat to speculate in markets using quant computers and insider information, neither of which the taxpayer has access. Nor do they have access to national level politicians, their contributions simply are not as large. Thus, the banks hoard their trillions while cutting off lines of credit to the very taxpayers who bailed them out. What lines are not cut are charged 30% or more, rates that the Godfather could only dream of.

The consumer knows that credit is tighter than it was before. I’ve been saying all along that total money and credit are contracting, that the world of derivatives and leverage is contracting despite our government’s best efforts to flood the system with money. While it’s difficult to see the overall shape of the shadow banking world, clues can be found when digging. Again, I point to the OCC reports showing that JPM notional derivatives have shrunk by some $10 TRILLION in the past two years despite acquisitions. The OCC reports overall growth in derivatives, but that is only because investment banks, speculators like Goldman Sachs, applied for and were granted status as a commercial bank (to gain access to taxpayer money).

So, we have the money supply increasing, government debt skyrocketing, but that is more than offset by the shadow banking system and falling overall private credit. Today I’m going to show you the real dollars behind the collapse in consumer credit along with how that is affecting the securitization of that credit, this being but one small piece of the derivatives and credit (debt) world.

Yesterday, a $14.8 billion contraction in consumer credit was reported for the month of September. That translates into a contraction at an annual rate of 7.3% for the month, 6.1% in the third quarter, which follows a 6.6% contraction in the second quarter. Revolving credit decreased at an annual rate of 10 percent, and nonrevolving credit decreased at an annual rate of 3.8 percent.

It would seem that never ending growth has ended. Keep in mind that the consumer and their spending represents 70% or more of this nation’s economy.

Let’s start our tour of the charts by showing that the contraction is not just in consumer credit. Below is the latest chart from the St. Louis Fed showing Total Loans and Leases at Commercial Banks percent change from a year ago:

Now, let’s look at consumer credit and its components. Below is a chart showing Total Consumer credit expressed in billions of dollars change from one year ago:

There are two types of consumer credit, revolving (credit cards, lines of credit, etc.), and nonrevolving. Below is the chart of Total Revolving Credit Outstanding, again expressed in billions of dollars change from last year:

Next is the Total Nonrevolving Credit Outstanding expressed in billions change from a year ago:

The Fed actually reports Securitized Total Consumer Loans, but I would contend that their data does NOT capture nearly all of it, nor does it capture all the derivatives based around it, credit default swaps and the like. Still, you can see that the securitization process is no longer creating never ending growth in this category. Of course the "securitization" of debt process did not exist prior to about 1990:

The Fed further breaks down who holds consumer debt. Below is a chart of Consumer Revolving Credit Owned by Finance Companies:

Consumer Revolving Credit Owned by Commercial Banks:

Of course, as credit contracts, businesses do poorly, and they lay people off. Below is the updated chart of those who have been unemployed for 27 weeks or longer:

Unemployed people and people without credit do not order things, as this chart showing Durable goods orders attests:

Good luck with the “recession is over” call, welcome to the second Great Depression, what I now label the Great Deception. Keep in mind when you see trumped up GDP growth figures that even during the Great Depression of the ‘30s that GDP was positive off and on for years while the people suffered. Today we may not have soup lines extending for blocks, instead they collect unemployment, food stamps, buy their cars with the help of government money, and buy their houses on the backs of taxpayers too. The person next to you in the checkout line may look solvent, but they may be shopping with your money.

Those thinking that real recovery is here or is imminent had best keep their eye on consumer credit. They are confusing speculation and false accounting with growth. That will become more and more evident given time. The myth that more debt can cure a debt problem, that incomes can support never ending credit growth is simply a dream true only in the minds of central bankers and their minions…

Friday, November 6, 2009

In this week’s update of Monetary Trends there are a couple of changes worth noting.

When looking at the money aggregates in terms of yoy percent change, we now see that M1, M2, and the larger MZM are all three pointed down. The change is that in this update we see M1 turned down sharply although still deep in positive territory.

Our country is on such a fructose sugar high that attempting to stop the intake now will surely result in a raging migraine.

The velocity chart has now produced a positive upslope for the first time since this bear market began. I believe that this is the result of the formula that calculates velocity… as money floods the system, the math requires velocity to decrease and as it begins to recede the opposite occurs. This is going to be very interesting to watch going forward:

Price to Earnings ratio for the S&P 500 was in a small decline, but has actually increased slightly through this 11/4/2009 revision date. There are those who argue that we shouldn’t be looking at this chart (just close your eyes)… they argue that the bank’s large write-offs and write-downs are to blame and that with mark to fantasy we’ll see these “rearward looking” P/E ratios decline precipitously. My response? Bull. The banks are completely insolvent and if they marked their assets to anything close to reality the entire market would be deeply underwater and this P/E would be rightfully infinite. You can argue against history if you like, and come up with your own forecast for future earning based upon whatever fantasy you like, but you cannot talk away this classic historical indicator of market value:

Someone on TF posted a chart with a little more P/E history, this chart goes all the way back to 1937. The current P/E is more than twice as high as the Nasdaq bubble in 1999:

Here’s the entire issue of Monetary Trends. A lot of monetary downtrends in there:

Consumer credit came out this afternoon for the month of September. We got yet another net decrease, this time it was a drop of $14.8 billion, the consensus was for a drop of $10 billion (only a 48% miss). Here’s Econoday’s chart, the Fed has yet to update theirs:

When the “Recovery Plan” was being sold, the public was presented a chart of what the Unemployment rate would look like with and without the plan being implemented. Of course it was implemented, and here’s how the “rate” (hello, try 17.5% in reality) is stacking up:

Chart from www.innocentbystanders.com

Boy, it sure is a good thing we got that recovery plan going and gave away all those trillions!

When the phony baloney bank stress tests were run, they were run under a “baseline” and a “more adverse” set of conditions. Below is a chart showing that reality is proving worse than their worst case conditions:

Chart from www.calculatedriskblog.com

Of course when the results of this phony test were announced, it was stated that the banks would likely not survive an unemployment rate greater than 10 (foreclosures track unemployment almost perfectly). Sure they can, just change the way they do their accounting, close your eyes, plug your ears, and hold your nose while shutting off your brain. What problem? Buy stocks! Hey, it’s not like we’re talking ‘bout something important, like love…

No kidding, this is exactly what I said when I learned that taxpayers were losing all of their $2.33 billion “investment” in CIT. No one, and I mean NO ONE, is looking after taxpayers interests in these bailouts. Geithner is INCOMPETENT and should be FIRED. Of course that would require that there be an adult in the room, there are none.

Normally I support real infrastructure building, when it is appropriate. And America has not been building airports or runways at anywhere near the rate of traffic growth. However, this is a great example of politicians grabbing money and spending it inappropriately.

These wasteful misallocations are nothing new, of course, but they add up, and add up, building our exponential debts upon one another. Creating infrastructure that builds commerce is one thing, but building infrastructure that does not simply adds to future carrying costs as that infrastructure must be manned and maintained (ht Don).

Equity futures were up but dove hard on the Employment situation report:

The dollar is up, bonds are up, and VERY interestingly, oil is diving while gold soared initially, but now also reversed.

And the headline came in even worse than I expected at 10.2%, 190,000 jobs lost in the month of October if you believe their numbers. I don’t. And while the monthly number is decreasing, the total percentage of the population unemployed keeps growing as no new jobs are being created. Please witness the U6 “alternative” report…

A jump from 17 to 17.5%! Truly not good. I’ll dig deeper into the numbers and will report either in another post or in the daily thread (don’t miss Point’s analysis either!). Below is the entire BLS report:

HighlightsThe jobs picture in October worsened as the unemployment rate topped double digits and payroll jobs fell more than expected. Nonfarm payroll employment in October declined 190,000, following a revised decrease of 219,000 in September and a revised contraction of 154,000 in August. The October fall in payroll employment was more negative than the market projection for a 175,000 decrease. September and August revisions were up 91,000 net for the two months (the net declines were smaller).

Payroll losses were widespread in both goods-producing and service-providing sectors but declines were sharper in the goods-producing sector. Goods-producing jobs contracted 129,000 in October, following a 114,000 decline the month before. Construction jobs fell 62,000 while manufacturing decreased 61,000 and mining dipped 5,000.

Wholesale trade numbers come out at 10 Eastern, Consumer Credit at 3 Eastern. Consumer credit is tightening as banks conduct their CREDITORY practices of jacking rates and closing accounts, something that is accelerating now that the date for the new credit card laws has been moved up. No credit, no jobs, the consumer is 70% of the economy and therefore no meaningful recovery.

One piece of evidence of that came yesterday when we learned that retail online sales decreased by 2% yoy in the 3rd quarter, the first time in history that we have had two successive quarterly yoy drops in online sales.

From a technical point of view, if you remember I’ve been saying that wave 2 is the “fool ‘ya” wave. I can’t tell you how many people I read last night were talking about new highs. The DOW did make it back to 10,000 retracing 75% of its downtrend, but as I looked around the charts last night I could see that it is the anomaly as the XLF did not even make it back to 38.2%! The market does not go forward without the financials.

Neither the Utiilities nor IYR made it back to the 38.2%, most indices did make it back to the 50% level, the S&P back to 61.8%, and the DOW led as defensive big caps do - initially.

And, just like I thought, we went to the top of the small rising wedge in the S&P, the top of the channels in the other indices, and now we are returning back down. My guess was that we would go to 1,070ish, and the /ES topped out 1,069, a near perfect 61.8% retrace.

This means that my primary wave count is likely correct, and that we may have just begun wave 3 down. I’ll want to see the bottom of the current channels break for confirmation. The action in the dollar will also be very important.

The first pivot in play is 1,061 with overhead at 1,090. The 38.2% fib is at 1,057, the bottom of the SPX channel/wedge is around 1,054, and the next lower pivot is at 1,041. If the 1,061 pivot falls, then momentum will shift back to the downside.

We were overbought on the short term oscillators yesterday, so I would expect this downdraft to have some legs to it, we'll see.

Boy, watching those Texas politicians place multiple votes yesterday just made me more furious than I already was - it was the Fannie house renting/bad asset hiding that really got me fuming. We are continuing to plunder as Bastiat so eloquently stated way back in 1850, we're trading our freedom for security, but losing it all in the process, and as Point was mentioning in our thread yesterday, "Hey, freedom's just another word for nothing left to lose…"

Thursday, November 5, 2009

- Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.-- Frederic Bastiat

Martin Armstrong talks a lot about the law and the importance of following the rule of law, it’s one of the primary ingredients to the formation of capital. Without it, capital will flee. Without it, society breaks down – just view the video on the preceding post to see that happening in real time. Allow the rule of law to break down too far, and eventually you will get revolt.

That’s exactly what Frederic Bastiat wrote about when he wrote “The Law,” first published in the year 1850 (he died that Christman Eve). Frequent contributor, Joe, turned me onto his writing this morning by posting the following passage from his Bastiat’s pamphlet:

"Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.

But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.

Now since man is naturally inclined to avoid pain — and since labor is pain in itself — it follows that men will resort to plunder whenever plunder is easier than work. History shows this quite clearly. And under these conditions, neither religion nor morality can stop it.

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor.

It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.

But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds."

Simply stated and oh so true. What he could not see was the eventual entanglement of corporations and their money with government. Plunder is a severe understatement for what's happening in America, and why I say that we need to separate our coporations and their money from state.

So, we have a ying and a yang with government… too much law and too much government and we head into socialism (plunder); too little law and we degenerate into lawlessness. Once again life is a balance, just as Freedom and Security are intertwined and must also strike a balance. Pursue freedom, you will find security. Pursue security, you will compromise both security and freedom. Pursue security no matter the cost, and you will have neither security nor freedom.

Reading the entire work of Bastiat’s "The Law" pamphlet doesn’t take long and I highly recommend that you read it online at this site - The Law - Frédéric Bastiat.

Scroll down and you’ll begin reading with his work broken clearly into little, easy to read, pieces. Be sure to read the introduction there.

You’ll find that his thinking and writing was shaped by a revolutionary period in France. The introduction draws the analogy of France at that time (The French Revolution) to the U.S. of today and the similarities are striking.

Not only does he slam socialism, but he also slams other forms of government as well. The closest thing to perfection, in his opinion, was the then pre-Civil War United States. Of course the U.S. Constitution and Declaration of Independence were founded upon many of the same principles as the Magna Carta. Life, Liberty, and the pursuit of happiness are, according to Bastiat, a part of the order of nature.

Definitely timeless thinking and timeless writing, below are some of passages that caught my attention:

The Cause of French Revolutions…This will remain the case so long as human beings with feelings continue to remain passive; so long as they consider themselves incapable of bettering their prosperity and happiness by their own intelligence and their own energy; so long as they expect everything from the law; in short, so long as they imagine that their relationship to the state is the same as that of the sheep to the shepherd.

The Enormous Power of Government…But if the government undertakes to control and to raise wages, and cannot do it; if the government undertakes to care for all who may be in want, and cannot do it; if the government undertakes to support all unemployed workers, and cannot do it; if the government undertakes to lend interest-free money to all borrowers, and cannot do it; if, in these words that we regret to say escaped from the pen of Mr. de Lamartine, "The state considers that its purpose is to enlighten, to develop, to enlarge, to strengthen, to spiritualize, and to sanctify the soul of the people" — and if the government cannot do all of these things, what then? Is it not certain that after every government failure — which, alas! is more than probable — there will be an equally inevitable revolution?

Politics and EconomicsA science of economics must be developed before a science of politics can be logically formulated. Essentially, economics is the science of determining whether the interests of human beings are harmonious or antagonistic. This must be known before a science of politics can be formulated to determine the proper functions of government.

Immediately following the development of a science of economics, and at the very beginning of the formulation of a science of politics, this all-important question must be answered: What is law? What ought it to be? What is its scope; its limits? Logically, at what point do the just powers of the legislator stop?

I do not hesitate to answer: Law is the common force organized to act as an obstacle of injustice. In short, law is justice.

The Basis for Stable GovernmentLaw is justice. In this proposition a simple and enduring government can be conceived. And I defy anyone to say how even the thought of revolution, of insurrection, of the slightest uprising could arise against a government whose organized force was confined only to suppressing injustice.

Under such a regime, there would be the most prosperity — and it would be the most equally distributed. As for the sufferings that are inseparable from humanity, no one would even think of accusing the government for them. This is true because, if the force of government were limited to suppressing injustice, then government would be as innocent of these sufferings as it is now innocent of changes in the temperature.

As proof of this statement, consider this question: Have the people ever been known to rise against the Court of Appeals, or mob a Justice of the Peace, in order to get higher wages, free credit, tools of production, favorable tariffs, or government-created jobs? Everyone knows perfectly well that such matters are not within the jurisdiction of the Court of Appeals or a Justice of the Peace. And if government were limited to its proper functions, everyone would soon learn that these matters are not within the jurisdiction of the law itself.

But make the laws upon the principle of fraternity — proclaim that all good, and all bad, stem from the law; that the law is responsible for all individual misfortunes and all social inequalities — then the door is open to an endless succession of complaints, irritations, troubles, and revolutions.

Justice Means Equal RightsLaw is justice. And it would indeed be strange if law could properly be anything else! Is not justice right? Are not rights equal? By what right does the law force me to conform to the social plans of Mr. Mimerel, Mr. de Melun, Mr. Thiers, or Mr. Louis Blanc? If the law has a moral right to do this, why does it not, then, force these gentlemen to submit to my plans? Is it logical to suppose that nature has not given me sufficient imagination to dream up a utopia also? Should the law choose one fantasy among many, and put the organized force of government at its service only?

There is much more worth reading, I hope you take a few minutes to read it if you aren’t familiar.

If you wish to read it in one piece, below is his work as published by the Mises Institute. The Foreword here is written by Thomas DiLorenzo and is excellent.

I will leave you with the last two paragraphs from his work simply entitled “Government,” and ask simply, under which of the following forms of government do we currently reside?

Citizens! In all times, two political systems have been in existence, and each may be maintained by good reasons. According to one of them, Government ought to do much, but then it ought to take much. According to the other, this two-fold activity ought to be little felt. We have to choose between these two systems. But as regards the third system, which partakes of both the others, and which consists in exacting everything from Government, without giving it anything, it is chimerical, absurd, childish, contradictory, and dangerous. Those who parade it, for the sake of the pleasure of accusing all governments of weakness, and thus exposing them to your attacks, are only flattering and deceiving you, while they are deceiving themselves.

For ourselves, we consider that Government is and ought to be nothing whatever but the united power of the people, organized, not to be an instrument of oppression and mutual plunder among citizens; but, on the the contrary, to secure to every one his own, and to cause justice and security to reign.

As this country slides into the economic morass, keep in mind that leadership always begins at the top. Morals and ethics are certainly no exception. When we look back and see what went wrong, we need to take a real hard look at our society and the way we think.

Perhaps these politicians were all raised in Dr. Spock homes, their parents never taught them the difference between right on wrong. Their teachers and principals were not allowed to perform “corporal punishment.” Their role models were Bill Clinton, a liar who would weasel his way around, and George Bush Junior who lied to the world and justified the killing of thousands. And we expect that our financial system would govern itself, would keep itself in check?

We are truly a lost society, that footage proves it. Wave C down, Kondratieff’s winter, the Fourth Turning, the end of an era, a “cycle…” Whatever one calls it, change is coming, and while I’m thinking that it can get much worse, in the end it’s going to bring a much needed cleansing.

This is a complete and total government scam at the behest of the central bankers. It is so infuriating that I’m just going to post the article and then let Karl Denninger explain the situation as he has perfectly nailed it – in a nutshell it’s all an accounting scam, yet another attempt to delay the recognition of losses.

Fannie Mae to allow troubled borrowers to hand over deeds to homes, let former owners rent

Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new "Deed for Lease" program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

The program will "eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities," Jay Ryan, a Fannie Mae vice president, said in a statement.

But the effort is likely to affect a relatively small number of homeowners. In the first half of the year, Fannie Mae took back about 1,200 properties through this process, known as a deed-in-lieu of foreclosure. That pales in comparison to the 57,000 foreclosed properties the company repossessed in the period.

While neither option is particularly attractive for the homeowner, a deed-in-lieu does less harm to the borrower's credit record.

The rental program is designed to help homeowners who don't qualify for a loan modification under the Obama administration's plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period.

Fannie Mae has hired an outside company, which officials declined to identify, to manage the properties.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can't be more than 31 percent of their pretax income.

Fannie Mae's sibling company, Freddie Mac, launched a similar effort in March. That policy, however, requires the foreclosure to be complete and only allows month-to-month leases. A Freddie Mac spokesman declined to say how many borrowers have participated.

It is entirely about Fannie not having to recognize the written-down value of these houses - that is, allowing them to hold the "mark" on the loan at it's original value, rather than recognize the loss.

The rental program is designed to help homeowners who don't qualify for a loan modification under the Obama administration's plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period.

Fannie won't sell the properties because then they would have to recognize the mark.

This is nothing other than yet another scam to avoid recognition of bad paper Fannie took on their books and has a HUGE embedded loss.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can't be more than 31 percent of their pretax income.

Oh, so the rent can't be more than 31% of their pretax income, but the original note's payment was, right? After all, if it wasn't then the homeowner wouldn't have been in foreclosure in the first place!

That's the key paragraph, and tells you that:

- This is simply an attempt to avoid mark-to-market on the properties.

- The rent charged will be insufficient to meet the PITI (Principal, Interest, Taxes and Insurance) on the original note, as by definition if it could the "homeowner" wouldn't have defaulted in the first place!

This is yet another scam folks, all courtesy of our government who will do anything to avoid admitting the extent of the liabilities that are now in Fannie and Freddie's portfolio (and by extension, partially in The Federal Reserve as well!)

But the economy is getting better, right?

That's why we keep seeing scheme after scheme, scam after scam, all intended to do one and only thing - avoid a true and accurate accounting of losses that have already occurred.

And the market roars - it spiked a full 1% on this announcement - on yet more government-sanctioned and legalized fraud.

IF the economy was truthfully improving we wouldn't need any of these schemes. Honest profits would be sufficient to both support the housing and stock market. The fact is those honest profits simply do not exist, and neither does the value of these "assets" support the loans outstanding against them.

IF the government gave a damn about these homeowners they would instead reset the loan to the discounted cash amount of that market rent and re-write the loan at that same 31% of the homeowner's income. Of course that would force recognition of the fact that the property isn't worth anywhere near what the loan balance is, and thus force Fraudie and Phoney to EAT the bad paper they're holding.

Scam scam scam scam scam - it's all good for the banks and oligarchs, while the average American is dispossessed of his house!

Thanks, Karl, couldn’t have said it better myself. Well, maybe I would have thrown in a couple extra SCAMS! Can you tell me how to get, how to get to Sesame Street? Maybe I can find a good "rental" to live in there...

HighlightsMonster's employment index rose 1 point in October to 120 indicating a slight improvement in job demand. Transportation & warehousing, a sector especially sensitive to pivotal shifts in the economy, was unchanged for a third straight month.

Weekly unemployment continues to run over 500,000 per month, this month at 512,000. I remind everyone that we need to ADD jobs at the rate of 150,000 per month just to break even with population growth. The unemployed have been unemployed for record amounts of time, roughly 7,000 per day are falling off the roles, their benefits exhausted.

HighlightsInitial jobless claims are clearly on the decline, down 20,000 in the Oct. 31 week to 512,000 (prior week revised 2,000 higher to 532,000). The four-week average is down for the ninth straight week, 3,000 lower at 523,750 for a 25,000 decrease from late September. Continuing claims are also declining but here the change is likely a negative, due largely to the expiration of benefits. Continuing claims, in data for the Oct. 24 week, fell 68,000 to 5.886 million for the seventh decline in a row. The unemployment rate for insured workers is unchanged at 4.4 percent, a level that is down 8 tenths from a peak in late June. In contrast, the overall employment rate has continued to climb, at 9.8 percent in September and is expected to increase another 1 tenth in Friday's data for October. Remember, improvement in both initial and continuing claims during September did not correlate to improvement in either payrolls or the household survey.

In more quirky statistics, we see wild swings in worker productivity thanks to annualizing the one month numbers and thank to cash for clunkers and other government spend money we don’t have programs:

HighlightsRecession induced labor cost cutting has continued into the recovery and businesses are seeing gains in productivity as a result. Nonfarm business productivity in the third quarter surged 9.5 percent annualized, following a revised 6.9 percent boost in the second quarter. The third quarter advance came in above the market forecast for a 6.3 percent surge. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7 percent. In tandem, unit labor costs dropped an annualized 5.2 percent after declining a revised 6.1 percent in the second quarter. The consensus had projected a 3.9 percent plunge.

Year-on-year, productivity improved to up 4.3 percent in the third quarter from 1.9 percent the previous quarter. Year-ago unit labor costs dropped to minus 3.6 percent from down 1.2 percent in the second quarter.

A huge part of the third quarter boost in productivity came from the manufacturing sector which saw a 13.6 annualized percent spike after a 6.8 percent gain in the second quarter. The latest manufacturing number was the largest quarterly increase for the series which begins in 1987. Much of the improvement likely came from the auto sector which had seen huge layoffs but recent output increases from the impact of the cash-for-clunkers program.

The latest productivity numbers are good news for companies trying to improve their profits but they are bad news for the unemployed. Firms are expecting remaining employers to work harder instead of starting to rehire.

The third quarter jump in productivity should help lift equities.

Look at that chart! Labor costs are crashing. When will they learn that in a consumer economy people must work in order to spend? It's either a virtuous circle or it's the toilet bowl swirl. I'm seeing swirl. All businesses need workers who earn money through work to buy their products. We are seeing a historic shift in that now some people are getting their money for free from the government for doing nothing – unemployment checks, food stamps, cash for clunkers, housing tax credits, all designed to pump money into the system. No, productivity is not growing at nearly 10% a year, that’s an anomaly of their statistic gathering. Note, however, that the pressure being placed on working people in America is gathering steam. Fewer hours worked, less pay. The middle class squeeze that really got started with Greenspan’s policies is running much hotter now.

Meanwhile the government fights to keep housing expensive, voting just last night to extend the housing tax credit both in terms of time and massively in terms of who’s eligible. The Senate did this in concert with extending unemployment benefits, favoring people who are unemployed in hard hit states over those who are unemployed in not so hard hit states… the logic of which completely escapes me, but that’s our government with their stupid hands ruining every aspect of the America we thought we lived in.

Lawmakers pass bill extending unemployment benefits by up to 20 weeks. Legislation also extends homebuyer tax credit into next year.NEW YORK (CNNMoney.com) -- After weeks of partisan debate, the Senate voted on Wednesday to lengthen unemployment benefits by up to 20 weeks and to extend the $8,000 homebuyer tax credit.The closely watched legislation would extend jobless benefits in all states by 14 weeks. Those that live in states with unemployment greater than 8.5% would receive an additional six weeks. The proposal would be funded by extending a longstanding federal unemployment tax on employers through June 30, 2011.

The measure would apply to those whose benefits will run out by Dec. 31, which is nearly two million people, according to Senate estimates. Those whose checks have already stopped would be able to reapply for another round.

The vote was 98 to 0.

"With 15 million Americans still unemployed and vying for just three million available jobs, we did the right thing today by passing this bill and doing it in a fiscally responsible way," said Sen. Max Baucus, D-Mont., who helped craft the bill. "Today, we gave unemployed Americans the chance they need to get back on their feet, get through this tough time and get working again."

The measure now moves to the House, which passed its own benefits extension in September, giving an additional 13 weeks in high-unemployment states. The two bills must now be reconciled, though the House is expected to support the Senate's version.

"Now that this legislation has passed the Senate, I will bring it to the House Floor for a vote as early as tomorrow," said House Majority Leader Steny H. Hoyer of Maryland.

The bill would then move to the White House for the president's signature. Last week, the administration said it supports extending benefits.

7,000 a day losing benefitsThe Senate has been bickering over the details since September, and that cost more than 200,000 people their benefits. Some 7,000 unemployed Americans run out of benefits each day, according to the National Employment Law Project.

Millions of Americans are now depending on unemployment benefits, as the unemployment rate continues to soar. The unemployment rate hit a 26-year high of 9.8% in September, and is expected to go even higher when the October numbers are released on Friday.

More than one in three people who are unemployed have been out of work for at least six months, according to the law project.

Lawmakers twice lengthened the time people can receive checks to as much as 79 weeks, depending on the state. But at least one Republican warned this would be the final extension.

"The public needs to ... know, this is the last extension," said Johnny Isakson, R-Ga.

Tax break for buying a homeThe legislation also would extend the $8,000 homebuyer tax credit to contracts signed by April 30 and closed by June 30. The controversial credit, which many say has boosted home sales in recent months, was set to expire after Nov. 30.

The Senate's bill also created a $6,500 credit for those who buy a home after owning one for the last five years. That measure would apply to contracts signed by April 30 and closed by June 30. The current credit defines a first-time homebuyer as someone who has not owned a residence within the past three years.

The Senate bill would raise the adjusted gross income cap to $125,000 for single filers and $225,000 for joint filers. The amount of the credit currently begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers.

"It's gonna put people back to work, the home builders, put people in the real estate business," said Sen. Chris Dodd, D-Conn. "The kind of jobs that can make a difference."

The extension will cost $10.8 billion over 10 years, according to the Joint Committee on Taxation.

Through mid-September, 1.4 million tax returns had qualified for the credit, according to the IRS. Some portion of those returns, which the IRS couldn't specify, represents buyers who took advantage of an earlier version of the tax credit, which was only worth $7,500 and has to be repaid over time.

By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors.

"The data on the present home buyer tax credit show that the credit has had its intended impact -- sales have jumped in recent months to a projected 5.1 million for the year and housing inventory has been trimmed, thus stabilizing home prices noticeably," said Ron Phipps, the association's first vice president, in Senate testimony last month.

The credit, however, has also posed many problems. Critics say it's a waste of money because most of those claiming the credit would have bought homes anyway.

It's also been the target of fraud. Some 74,000 people claimed more than $500 million in credits even though they may not be first-time homeowners, according to Treasury officials. And more than 580 children, including some as young as 4-years-old, have claimed the credit.

"Some key controls were missing to prevent an individual from erroneously or fraudulently claiming the Credit and receiving an erroneous refund of up to $8,000," said J. Russell George, Treasury inspector general for tax administration, before a House subcommittee last month.

Was there ever any doubt they would vote to spend more money they don’t have, or that they would fight to keep housing UNAFFORDABLE to those who are smartly and patiently waiting for home prices to come down into historic affordability levels? Does everyone get that the tax credit is designed, not to provide affordable shelter for Americans, but to provide more taxpayer life support to the banks? Have we learned anything? Apparently not, and thus wave C down is going to be long and painful, and it will continue until the lessons of math and history are learned again. Yes, that is part of the cycle, but this cycle is on a much higher level than even that of the Great Depression. I’m thinking this should be called the Great Deception.

They justify these actions in the name of being humanitarian, but in fact what they are doing is simply insane. There is very little real economy left, either these programs go on forever (likely) or when they eventually end, the economy will simply continue to crumble at that time. Everyone will blame everyone else, never seeing the role they played in creating a shell of a once vibrant economy.

I covered the technicals pretty thoroughly yesterday evening. It looks like we are sketching out a little a-b-c that follows wave 1 down to produce wave 2. The top of wave twos is the place to get short, in my opinion. I think we’re likely to run up to the 1,061 pivot and possibly to the 61.8% fib which is located just above 1,070. Somewhere near this range, if the wave count is correct, we should roll over into wave 3 down. By the way, this wave 2 and wave 3 are most likely all a part of a larger wave 1, just to put every thing into perspective – there’s a long way to go and there will be a lot of opportunity along the way.

I’m not sure how long c of 2 up will last… it could top later today, tomorrow, or even early next week. I would not be surprised if it fizzled today, especially with the gravestone doji produced yesterday. Proportionality would suggest, however, that maybe it runs into the weekend, and then wave 3 would begin next week. And Monday is the 9th, a Bradley and Fibonacci turn date. I should note that it is still possible by the count that wave B up has not finished… we could even go on to new highs, and thus it could be that we make a turn higher for a final run up. I HIGHLY doubt that, not with all the other signs of a top, like the rising wedges. But, that’s why when I get short, I place stops and limits on my positions and do not accept large losses. If I’m wrong, then I’m wrong, I fight to keep my mistakes small. Something our government should have been doing and learning years ago. Ahh, if only they had one of these…

Wednesday, November 4, 2009

Another good lesson in law and history, Martin also gives an update on his support and resistance levels for the DOW along with his timeline for those levels.

According to Martin, “The long term trend is unquestionable. We will collapse without any dispute even possible.”

What follows is a letter written by Armstrong once again pleading his case to Judge Keenan. This is a very interesting letter with Martin bringing up some interesting arguments. I certainly don’t think it would harm Armstrong if his fans were to write to Judge Keenan at the address in the heading of this document. In fact enough pressure from the public may very well benefit everyone by at least getting him released to home detention where he would have access to computers and the wider legal system.

Elliott Wave International’s Founder, Bob Prechter, reiterates his belief that the top is in, that the decline will be equal to or worse than the decline in 2008, and that the dollar faces a “year or two” of strong rally.

Of course he is selling his new book, so beware! Seriously though, if the decline is as sharp as he believes (which I do not doubt), then this country is in serious trouble as is our currency system. One thing I completely agree on, it’s time to buckle up.

Strange day marked by buying ahead of, and even after the FOMC release, but then a meltdown at the end of the day. Fundamentally the Fed is on shaky ground and the market is seeing through all the word games and bullshit. Zero percent interest rates and money printing are their actions, the rest is just spew. Here’s the real deal… loan delinquencies, defaults, and bankruptcies are soaring. Employment is WAY down, and been down so long that people are falling off the roles. We have nearly 12 % of our country living on food stamps. Credit and the shadow banking world of derivatives is collapsing (greater than government stimulus). We have made it through the bulk of subprime resets but are now entering the beginning of the wave of Option-Arm resets. This next wave of resets, along with the simultaneous collapse in commercial real estate will stick a fork in already insolvent banks that are pretending to hang on.

T2 Partners chart of resets, current as of 1 November:

From a technical perspective, today’s action produced some funny looking candles, so let’s take a quick look at the situation to see where we’re likely headed in the short term. To the charts…

Starting with a one month daily chart of the DOW, we can see an odd looking candle with a long rising stem showing that buyers were strong early but the bears came in late. On it’s own, that odd candle doesn’t mean much, sometimes prices will subsequently climb a stem like that, especially when it’s presented as dueling hammers as this appears here . The DIA candle doesn’t look quite as bullish, it’s black meaning that the close was below the open, and the head is not as well formed. The Industrials have been relatively strong in the decline so far, again that’s to be expected as investors initially get defensive:

Not really a lot to look at there, so let’s move on.

The Buffett bombed Transports of yesterday, opened lower and stayed there most of the day. Yesterday’s 5%+ move was aberrant in terms of the fundamentals, the technicals, and the volume that single day produced. I’m certain it will be washed away given a little time. Today’s down move took some of it away, it could be consolidation prior to higher, but then again, a run was made at the 50dma and failed, casting a “cloud” over yesterday’s candle. Note that the 50dma is now sloping down, something that hasn’t happened in the indices for quite some time. We’ll need to see more action to know much here:

The SPX candle is where things really start to get interesting. It looks like a black gravestone doji. The position of a gravestone is important, in this case it follows a little two day uptrend. Definitely looks bearish, but we need to be careful in that assumption as any Gravestone needs confirmation by the following day’s activity. It is also sitting right on the 23.6% fib, a potential area of support. It, too, tried to penetrate above the 50dma and failed:

Here’s a diagram from StockCharts.com illustrating and defining a Gravestone Doji, just for your education:

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

So, there you go, the candlestick on the daily here is at the end of a small uptrend… it would be more pretty at the very top of wave B, but that’s not where it is and thus we need confirmation.

When I drill down into a 30 minute chart of the SPX, I see a few things in play. First of all, let’s do some Elliott Wave counting. If the move in the channel was wave 1 down to a 1,030 bottom, then we have just, over the past three days, produced an A and a B… meaning that next should come wave C up as a part of wave 2. Following that would come 3 down. That could very well be, and C could all happen tomorrow into Friday and then fail (on the employment report?)… just one possibility. There is also a small channel and/or a triangle in play – take your pick. I would also not be surprised by a run back up to the 1,061 pivot which would be coincident with the top of the channel, close to the 50% fib, and likely the top of wave C? Don’t know, but the selloff late day does not look like bullish market action:

Here's the TOS version of the /ES, 30 minute:

The XLF is just flat out bearish looking. Today’s candle looks like cloud cover, a bearish formation. Here, too, the 50dma is now rolling over and the bottom Bollinger is bent down fully, out of the way:

Today the dollar fell pretty hard, closing below 76 once again while gold marched to a new high. But the real action for me was in the bond market where I’m starting to see a wave count that looks like higher interest rates are coming.

TLT, the 20 year fund, broke very cleanly down and out of its sideways channel. I have written much about this already, that sideways channel is a bearish flag. It is worth a monstrous 20 points, and this break could be targeting an eventual move all the way down to 75. That would mean much higher interest rates and would be a disaster for our debt riddled society.

Here’s a closer up, 3 month, view of TLT. This is where I can count the waves… from 100 peak on this chart down to 94 was a 5 wave move lower, let’s call that wave 1. Then it traced out an a-b-c and now looks like it may be beginning wave 3 lower. That would be bad. And notice that this wave structure aligns with the same move occurring in the SPX. Now, doesn’t that just shoot a giant hole in the analysts arguments who keep saying that “rates are normalizing somewhat… it’s a sign of health?” No, higher interest rates are a sign of RISK, and those higher rates increase the burden on everyone; debt saturated individuals, businesses, and governments:

Next is a two year chart of the TNX, the 10 year Treasury ETF. Today sent yields dramatically higher. Note the very large inverted H&S pattern with the double blue lines as the neckline. Should that neckline break, it is targeting interest rates of approximately 6%, much, much higher than the current 3.5% for the ten year. Look closely at the action over the past 2 months and you’ll see yet another, smaller, inverted H&S pattern. Should that neckline break, it will target the 4.0 to 4.1% range and will break the larger neckline in so doing. Will equities think that’s a good thing? Don’t think so. Again, if that chain of events unfolds and 6% is reached, it will break a 30 year downtrend line in rates, waking others up to the fact that the latest era of leverage has ended.

Debt… if you’re an analyst and you look past it, then you are blind. It is the elephant in the room, the object that everyone should be keeping their eye upon. You simply cannot cure a debt problem with more and more debt, to think that you can is absolutely insane. That insane group includes Larry Summers, Timothy Geithner, Barack Obama, Ben Bernanke, and a host of many others. Their insanity is destroying our nation – quickly. This next wave is the wave that cleanses away the nonsense. The lip service will stop, the debts and the markets will burn. It’s a shame that it had to happen, but it cannot be stopped by conventional means, the math is simply too far gone, our political and financial system far too corrupt.

I’m not cheering the collapse on, I know the real pain and suffering that will be endured by real people all over the world. Nonetheless, I know it will only get worse the longer the cleansing is delayed. Thus, I say burn, baby, burn – my satisfaction definitely will come in a chain reaction...

Jefferson County, Alabama, was nearly bankrupt by derivatives sold to them by JPMorgan. JPM just agreed to a $75 million dollar fine and to terminate the swaps without the contracted $647 million in “termination fees.” Why would JPM agree to this arrangement apparently brokered by the SEC (an arm of the 4th branch of government that JPM heads)? They would agree to keep it out of the courts where their methods would be exposed to the light of day – that’s why.

And their paltry $75 million fine represents only 1.3% of the $5.8 billion in derivatives sold.

What this article does illuminate, however, is the graft and corruption that is occurring in the world of politics and derivatives:

Nov. 4 (Bloomberg) -- JPMorgan Chase & Co. agreed to pay $75 million and forfeit another $647 million in interest-rate swap termination fees to settle a U.S. Securities and Exchange Commission probe into the sale of derivatives that helped push Alabama’s most populous county to the brink of bankruptcy.

JPMorgan will give Jefferson County, Alabama, $50 million and pay a $25 million penalty, according to an SEC news release. In addition, the agency charged two former JPMorgan employees for their roles in an “unlawful payment scheme” that allowed them to win bond and interest-rate swap business with the county, officials said in the e-mailed release.

The settlement comes a week after Larry Langford, the former president of the Jefferson County Commission and Birmingham mayor, was convicted for accepting $235,000 in expensive clothes, Rolex watches and cash from an Alabama banker who JPMorgan paid almost $3 million to help arrange the swaps associated with a refinancing of the county’s sewer debt.

Jefferson County, which includes Birmingham, the state’s largest city with more than 240,000 residents, has faced bankruptcy since February 2008, when a $3 billion refinancing of its sewer system collapsed during the credit crisis.

SEC Allegations
The SEC alleged that JPMorgan, Charles LeCroy, the banker who pitched the refinancing to Jefferson County, and Douglas MacFaddin, the former head of the New York-based bank’s municipal derivatives desk, made more than $8 million in undisclosed payments to close friends of county commissioners. The associates owned or worked at local-broker dealer firms that didn’t do any work on the deals, the SEC said.

In exchange, the county commissioners voted to select JPMorgan to underwrite the floating-rate sewer bond deals and provide interest-rate swaps, which were meant to lower the county’s borrowing costs, the SEC said. JPMorgan passed along the costs of the illegal payments by charging higher interest rates on the swaps, the SEC said.

“This self-serving strategy of paying hefty secret fees to local firms with ties to county commissioners assured JPMorgan Securities the largest municipal auction rate securities and swap agreement transactions in its history,” said Glenn Gordon, associate director of the SEC’s Miami office, said in a statement.
Payment to Banks

The county paid JPMorgan and a group of banks $120.2 million in fees for $5.8 billion of derivatives, according to a series of stories published by Bloomberg News in 2005. The payments were about $100 million more than they should have been based on prevailing rates, according to estimates in 2007 by James White, an adviser the county hired after the SEC said it was investigating the deals.
“JPMorgan is pleased to have reached a settlement with the SEC in connection with its investigation of Jefferson County,’ said JPMorgan spokesman Brian Marchiony in a statement.

The bank concluded the case without admitting or denying the allegations. LeCroy, 55, and MacFaddin, 48, didn’t agree to settle.

JPMorgan’s plan to pay politically connected firms to win the financing business from the Jefferson County commission began in 2002, according to the complaint. JPMorgan banker Charles LeCroy told his bosses they would pay $5,000 to $25,000 to Mobile, Alabama-based Gardnyr Michael Capital Inc. and ABI Capital, which both can be “helpful to us in Jefferson.”

Aiding Firms
The sums wound up running into the millions of dollars, according to the SEC. In July 2002, LeCroy told MacFaddin about how his plan paid off for the bank, which was selected that month to lead a $1.4billion bond deal.

According to LeCroy, Commissioner Jeff Germany and another unnamed commissioner told him JPMorgan would “have to take care of our two firms” in return for their support. The composition of the Jefferson County commission was poised to change in November.

“I said, ‘Whatever you want -- if that’s what you need, that’s what you get, just tell us how much,” according to the complaint, which cites tape recordings of the conversation. “They want it done before they lose control, because they want to help all their friends.”

New York-based JPMorgan, which disbanded the unit selling debt derivatives to municipalities in September 2008, is the first Wall Street bank regulators probed for the sale of unregulated contracts such as interest-rate swaps to states and local governments.

At least seven of the New York-based firm’s bankers are under scrutiny in a Justice Department criminal antitrust investigation of the sale of unregulated derivatives to local governments across the U.S., federal regulatory records show.

These are the actions of dirty politicians and mobster banksters whose false and destructive products have infested the world. No rule of law, the SEC is but a token, the entire financial system is corrupt. We need to separate corporations and their money from state, there’s really not a lot more to say.

Those who think the economy is going to go roaring off into a bright and shiny new future here based in LEI bunk, have their eyes closed. Get ready, because like Enron, Madoff, and like Ponzi, the reaper is hearing the cow bells, they are getting louder and louder, this is one. No need to fear this reaper, unless you are a central banker… or have a fever. What we really need are more cow bells, lol (ht Joe):